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MUMBAI: Next week when finance minister P Chidambaram reviews the performance of state-owned ...

MUMBAI: Next week when finance minister P Chidambaram reviews the performance of state-owned banks, he may well have to reflect on the fact that balance sheet size is in no way an indicator of the efficiency of a bank.

A study of select banks shows that a number of banks with a smaller business mix have reported higher profits than those with a larger business mix — which is deposits plus advances. For instance, Bank of India reported an operating profit of Rs 1,517 crore against its total business of Rs 2,25,406 crore. Compared to this, Canara Bank, which features among the largest state-owned banks, reported an operating profit of Rs 1,262.3 crore with total business of Rs 2,40,537 crore.

Similarly, Indian Overseas Bank has reported an operating profit of Rs 867 crore against its total business of Rs 1,29,628 crore. In comparison, Central Bank of India, which recently raised over Rs 800 crore from the capital market, reported an operating profit of Rs 511 crore, despite the fact that its business mix was much higher at Rs 1,44,816 crore.

Surprisingly, Canara Bank, which is undergoing a massive branding exercise, has a business mix three times that of Corporation Bank. Yet, its operating profit is only twice that of Corporation Bank. In fact, many banks including Allahabad Bank, Corporation Bank and Indian Overseas Bank with a far lower business mix than that of Central Bank of India have outpaced the Mumbai-based bank in terms of profits.

Analysts say if the profits are not commensurate with the business mix, it does not reflect well on the efficiency of the bank. Further, it also indicates that the bank has earned a lower fee income and that it has raised deposits on which the management has failed to generate healthy revenues.

But the performance of state-owned banks pales when compared with private banks. HDFC Bank, has reported an operating profit of Rs 1,610 crore, which is much higher than that reported by a host of large state-owned banks such as Canara Bank, Bank of Baroda, Bank of India and Union Bank of India.

Yet, its total business mix at Rs 1,53,347 crore is much lower than these banks. This could be partly because HDFC Bank has posted the highest net interest margin (NIM) of 4% in the local banking industry while most state-owned banks are stacked far below, averaging NIMs in the range of 2.3% to 3.5%.

Similarly, the country’s largest bank, State Bank of India, has a business mix twice that of the second-largest bank, ICICI Bank. Yet, the private bank has reported more than half the profit of SBI in the first six months. This is despite the fact that ICICI Bank’s NIM at 2.25% is much lower than that of SBI at 2.84%.

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